Journalism won’t die if you donate. Support Voice of San Diego today!
We’ve zeroed in on four issues that frustrate a broad spectrum of San Diego businesses, and have dubbed them The Four Horsemen.
Here’s the third one.
The pitch started with a simple statistic.
Come to Texas, officials told one San Diego County manufacturer, and your cost of doing business will drop nearly 50 percent.
The numbers were so persuasive Quality Controlled Manufacturing Inc. seriously considered an expansion there last spring, said COO Rick Urban.
After all, customers were asking for it. They want to see the Santee company’s prices come down. The state’s high taxes and San Diego’s high costs drive them up.
So Urban met with local leaders in Dallas and Wichita Falls, Texas, and a representative from then-Texas Gov. Rick Perry’s task force.
Lower taxes were a central part of the case for Texas. The company was told its tax burden would drop significantly.
Urban’s experience illustrates a huge challenge for California manufacturers, who face higher tax rates than their counterparts in other states. That puts California in a tough spot: Even as it expresses eagerness to grow manufacturing here, the tax climate gives nearby states an opening to poach local companies.
Things haven’t shifted much in the last year despite a new California partial sales and use tax exemption for manufacturing equipment, an incentive manufacturing advocates pushed for a decade.
Indeed, a yet-to-be-released analysis from the Tax Foundation, a right-leaning Washington D.C. think tank, shows California’s effective tax rate for manufacturers is among the worst in the nation.
Here’s a look at how California’s tax rates for different types of manufacturers compare with U.S. averages.
Boosters from other states are eager to point out the differences to California manufacturers like Urban’s company, a machining manufacturer that employs about 100 people. He’s heard from officials in about a dozen states.
“They all have that spreadsheet they’re willing to pull out very quickly,” Urban said. “And that’s before they offer the incentives.”
Quality Controlled Manufacturing ultimately decided to put off its out-of-state expansion plans and recently learned it’ll receive a $130,000 tax credit from California in exchange for creating 22 San Diego-area jobs.
Still, Urban acknowledges that once his East County facility hits capacity, he’ll likely consider putting new hires in Texas.
“The customer doesn’t care that you have the higher facility costs and taxes because you’re in California,” Urban said.
Ursula Wagstaff, president of Sorrento Mesa skin-care manufacturer CA Botana, said her company nearly moved to Texas in 2010 for similar reasons.
Wagstaff, whose San Diego facility employs about 25 workers, met with Perry and others.
The relocation fell through but Wagstaff believes her net profits would’ve risen 30 percent if she moved to Texas. She estimated taxes would’ve been responsible for half of that.
That would’ve meant increased take-home pay for CA Botana employees and more investment in the company, she said. “You have more money in your hand. That’s what your employees want, that’s what shareholders want.”
The California Manufacturers & Technology Association, the state’s largest manufacturing lobbying group, argues the state’s higher taxes, coupled with stringent environmental regulations, steeper energy prices and significant property and housing costs are increasingly driving California manufacturers to relocate or dissuading companies from locating here in the first place.
The group recently reported that just 1.5 percent of manufacturing expansions and openings in 2013 were in California while states such as Nebraska, Louisiana and Kentucky saw booms.
California also saw less than a 1 percent increase in manufacturing employment in the state from 2010 to 2013, far shy of the 6.3 percent national average, according to the group.
Gino DiCaro, a spokesman for the manufacturing group, said the state remains a hub for new products and innovations but companies often look elsewhere when they want to produce on a large scale because it’s cheaper and easier outside California.
“When those companies are incubating and doing research and development it’s the place to be,” DiCaro said. “The minute they need to become a household name and scale up there’s a better place to be.”
That puts San Diego leaders in a tough spot.
The city has made it clear it wants to add manufacturing jobs, which come with middle-class salaries.
Since Mayor Kevin Faulconer took office, the city’s handed out a handful of subsidies to a biotech manufacturer and two breweries. The mayor says he’d be open to offering more.
Meanwhile, the state has doubled down on incentive programs in the wake of the drawdown of a controversial enterprise zone program, which provided companies located in certain parts of the state with hiring tax credits.
The newer programs have competitive application processes that cater to companies with both the bandwidth to seek them and plans to expand. Gov. Jerry Brown’s billed them as an effort to bolster California’s manufacturing sector.
Rancho Bernardo-based D&K Engineering, which produces a variety of products, including medical devices, 3D printers and kiosks, had participated in the enterprise zone program.
CFO Jody Zevenbergen said applying for California incentives isn’t simple. The company’s relied on outside contractors to steer it toward specific incentives.
Still, Zevenbergen said his business isn’t looking to move elsewhere, though they’ve been approached by Texas officials.
Wagstaff is convinced the state needs tax reform for all manufacturers if it wants to keep its remaining production jobs.
“(Incentives) are a Band-Aid on the problem,” Wagstaff said. “It doesn’t solve the problem.”
This is part of our quest digging into the difficulties – real or perceived – of doing business in San Diego. Check out the previous story in our series, The Eternal Question for SD Businesses: Should I Pay or Should I Go?, and the next, SD Manufacturers Get One Powerful Pitch from Other States: Lower Taxes.